Monday, 26 November 2012

More Bafflegab on the Upper Churchill

In another recent ‘information dump’ the Minister of Natural Resources released a Paper entitled: “Upper Churchill: Can we wait until 2041?”   

Many critics of the Muskrat Falls development have advanced the view that the Government should not expose the small population of NL to high cost power and to the financial risk associated with the mega project; the idea is that our incremental power needs can be met from a variety of smaller, less risky sources, until the Upper Churchill Contract expires.
For at least a year, the Provincial Government has been attempting to dispel the idea that developing a portfolio small projects, under the “isolated island” option was a viable.  Your Uncle Gnarley scribe wrote an article on the subject entitled: Upper Churchill Contract: Inherent Uncertainty or Bafflegab.  When the Minister released the new documents, The Telegram on November 10, 2012, quoted him paraphrasing an opinion contained in the Paper.  Said the Minister:

“I know at one point I laboured under the illusion that as we waited for 2041 we would get free power, we would have unlimited power, but when you look at the corporate structure of CFLco it’s not that simple.
“It’s not going to be Hydro-Quebec simply agreeing that all power will be given to Newfoundland and Labrador.  Churchill Falls (Labrador) Corp. will still exist – its ownership split between Newfoundland Hydro (with 66 per cent stake) and Hydro Quebec (34 percent).  Whatever happens with Churchill Falls, the interest of Hydro Quebec simply can’t be ignored.

“There is no doubt that Newfoundland and Labrador will benefit in 2041 power, but it’s very difficult to envision what exactly will take place”.
It is difficult to contemplate that these are the comments of the Minister of Natural Resources, a lawyer and former a Minister of Justice.   

Let’s cut to the chase.
Any person who runs a company, in which there are minority shareholders, knows that the only requirement, in law, is that their rights must not be subjugated to the interests of the majority shareholder(s).  The majority shareholder, in this case, is Newfoundland and Labrador Hydro.  It is the owner of 66 percent of CFLco shares.    

The Minister suggests that the existence of a minority shareholder constrains CFLco’s ability to make decisions.  The Minister is wrong. It is true that, in 2041, CFLco will not be able to sell power to Newfoundland Hydro (NH) or to any other customer for a price that is less than the ‘market price’ (such an action would prejudice the minority shareholder).  But, it will be able to sell to NH, at the market rate.
Why would Kennedy be afraid of that conventional corporate practice? Is he confused about the rules?  Is he fearful that the truth may interfere with his mission to get Muskrat Falls approved? 

We should hope that power costs, in 2041, will be higher than they are now.  Why? Because, as owners of 66% of CFLco, NL will be the major beneficiary.
Newfoundlanders and Labradorians would do well to remember that the Moore’s Administration, in 1974, used $160 million of taxpayers’ money to purchase BRINCO, the developer of the Upper Churchill.  To date, little payback has been received on that investment.  

You may ask, if electrical rates in 2041 are high, won’t my power bill be impacted?  NO, is the short answer!  But, an explanation is required.
Upper Churchill power, in 2041, will have a ZERO cost base, except for the cost of on-going maintenance of the hydro plant and the cost of transmission to the island.

The Provincial Government owns 100% of Nalcor and Newfoundland Hydro Corp. is its 100% owned subsidiary.  Once CFLco sells electricity in 2041 to either Nalcor or its subsidiary (likely the latter because NH is already engaged in electricity sales), the government can adjust the cost of the power before it is sold to Newfoundland Power (the distributor); in so doing, it will not impact the minority shareholder of CFLco.    
Alternatively, the Government can reduce the “market price” by some other mechanism including by direct subsidy to the ratepayers.  Actually, for the Government, it’s a very simple process. Just keep in mind that, on a net basis, Government revenues are unaffected since it will receive 66% of the net income of CFLco.  There is no magic involved for Government; just a few more accounting entries for NH.        

That is what Mr. Kennedy, in his disingenuous way, is hiding from you.
Let’s move on.

The Minister’s Upper Churchill Paper also contains this quotation:
“Instead HQ’s minority shareholder position….and the legal rights that it confers, will have to be considered.  This will have various consequences, one of which is that CFLco may not be subject to being operated at the instruction of NLH.  Instead, there will be legal, financial and corporate obligations upon CFLco, including those of Directors of CFLco that may be appointed by NLH, as a result HQ continuing economic interests.  These obligations may or may not align with the Province’s public interest or policy goals at any given time.”  (Underlining added)   

This view might be believable, except that it is the NL Government who appoints a majority of Directors on the CFLco Board right now, and who will appoint possibly more than a majority in 2041.  What Mr. Kennedy is essentially saying to you is this:  be concerned that one or more Directors will not represent the interests of the Government that appointed them.  This is not credible.
One final point.  The Paper fails to note that at the end of 2041, the Province will also have the legal right to expropriate the 34% CFLco shares owned by Hydro Quebec.  The Upper Churchill Contract, having expired, ceases to be an interprovincial matter. Provinces, as the jurisdiction in which property rights are vested, enjoy the constitutional right to undertake such expropriation under Section 92A of the Constitution Act of Canada.  Possibly, NL won’t want to take that step.  Most importantly, such an option is available should unforeseen legal issues need to be resolved. 

In case you wondered, power from the Upper Churchill, upon expiry of the contract with HQ will be plentiful, available and cheap.
Mr. Kennedy’s ‘information dump’ has done little to advance the case that it is being responsible and transparent.  But, then, the Government’s case for the Muskrat Falls Project has always been dodgy.  I suggest, if this is the best Kennedy and his lawyers can do, pray that they have better engineers.

9 comments:

  1. While I wish what you said were true, it is not. The 1999 Shareholder's Agreement gives Hydro Quebec a special veto, including first right on CFLCOs shares. The 1961 Churchill lease agreement gives Hydro Quebec, together with CFLCO, a 99 year lease on the Upper Churchill waters, and an automatic 99 year renewal should they choose to exercise it..sound familiar? Bottom line is what Kennedy says is true, its just their answer is very flawed.

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    1. Brad: What has the water rights to Hydro Quebec got to do with the Upper Churchill contract...it expires in 2041; then this Province can exercise all its legal rights.

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    2. Just added your Blog to my Uncle Gnarley Reads List.

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  2. I ahve never been clear on this issue. are we over a barrel for up to 200 years? Winston Adams

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  3. Mr. Cabana, are you saying that HQ could opt to purchase the shares of CF(L)CO outright in 2041 or would that depend on whether CF(L)CO decided to sell them?

    Also, what did you mean by,"...what Kennedy says is true, it's just that their answer is very flawed."

    No wonder HQ is just lurking in the background, watching us speculate on water rights!

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    1. Hydro Quebec has first right to purchase any shares issued or sold by CFLCO. Kennedy knows the agreements referred to above have completely sunk NL as an exporter of power. They are trying to force their way through the deals signed as opposed to intelligently flanking HQ. That is where their approach is wrong and has failed time after time in the past. Yes, they are sitting in the weeds, and its only a matter of time.

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  4. The water rights, monopoly, granted to CFLCO in the 1961 lease are good for 99 years, plus an automatic renewal if they choose. When the 2041 contract expires any new agreement for the sale of that power must be approved by Hydro Quebec in accordance with their veto granted by the 1999 Shareholder's Agreement. In other words, in 2041 Hydro Quebec, through its veto on CFLCO, can refuse any deal on power sales until it gets the one it wants. The 1999 Shareholders Agreement finished NL off as a potential future exporter.

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    1. Does this rationale assume that all transmission from the Upper Churchill must go through Quebec after 2041?

      If so, a Maritime link large enough to handle the 5000 MW from that site may become a viable or only option. Surely, we would be better off taking a smaller profit than allowing Quebec to dictate terms yet again. But that also means that the proposed 500 MW link for Muskrat Falls is a colossal waste of money and a lost opportunity.

      While I hope Quebec will be reasonable after 2041, there is no guarantee that they will and there may be no other option. If need be, it could come down to using the power ourselves and trying to attract heavy power users with low cost power.

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